Gold is a favored investment during market turbulence due to its historical price increases during market crashes, driven by its inverse relationship with stocks. Additionally, the demand for gold surpasses the available supply, as it takes time to bring new mines into production and discover new gold deposits.
If investing in physical gold is not feasible, there are alternative options for investors in terms of cost and convenience. These alternatives encompass gold exchange-traded funds (ETFs) and gold futures.
Understanding the distinctions between gold ETFs and gold futures can help investors make informed decisions, just as staying informed about oil price forecast aids in navigating the energy market.
Gold ETFs versus gold futures
Let us first try to understand what are these two forms of investments in gold. Understanding the distinctions between Gold ETFs and Gold Futures is essential for successful gold trading, and these gold trading tips can help investors make informed decisions.
1. Gold ETF
Gold ETFs, which mimic stocks, offer a popular investment avenue backed by gold-related assets, providing portfolio diversification without actual ownership of physical gold.
While enabling smaller investment positions compared to physical holdings and futures, investors should be aware that the costs associated with trading gold-tracking ETFs can outweigh their convenience.
Gold ETFs may incur expenses, which the management can cover by selling gold. However, each sale of gold by the trust is a taxable event for shareholders.
2. Gold futures
Gold futures are exchange-traded contracts where buyers agree to purchase the commodity at a preset price on a future date, allowing investors to commit without full upfront payment offering flexibility in execution timing and terms.
Futures contracts offer investors greater financial leverage, flexibility, and financial security compared to trading physical commodities due to their exchange-based nature.
Comparison based on advantages
Now, let us compare the advantages of both these forms of investment in gold.
1. Gold ETF
Gold ETFs offer several benefits, including affordability and eliminating the need for physical storage, thus reducing the overall investment cost. In essence, they enable investors to efficiently diversify their portfolios without requiring significant capital.
2. Gold futures
Gold futures offer simplicity compared to corresponding ETFs, allowing investors to buy or sell gold at their discretion, providing flexibility with both short and long positions and eliminating counterparty risk on centralized exchanges. They demand less capital than physical commodities, potentially increasing returns and risks. Additional benefits include:
- Zero management fees.
- Tax advantages.
- Direct ownership of underlying gold.
- Margin amplifying investment potential.
Comparison based on risks
1. Gold ETF
Gold ETFs offer flexibility but come with liquidity-related risks, impacting the ease of buying, selling, and converting these assets into cash in the market.
2. Gold futures
Gold futures offer flexibility through online trading but entail risk. If gold prices move unfavorably, investors could face substantial losses when trading these contracts.
Final word
Gold ETFs offer a low-cost, diversified avenue for investing in gold-backed assets without owning the physical metal. Gold futures are contracts traded on exchanges where buyers commit to purchasing a predetermined amount of gold at a prearranged price on a future date.
